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		Per Share				Total
Public offering price		$	17.50			$	49,875,000
Underwriting discount		$	1.01			$	2,867,813
Proceeds to us before expenses		$	16.49			$	40,706,575
Proceeds to selling stockholders		$	16.49			$	6,300,613

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		Page
PROSPECTUS SUMMARY			1
RISK FACTORS			9
USE OF PROCEEDS			18
DIVIDEND POLICY			18
PRICE RANGE OF COMMON STOCK			19
CAPITALIZATION			20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			21
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2005			22
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION			25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27
BUSINESS AND PROPERTIES			40
MANAGEMENT			48
PRINCIPAL AND SELLING STOCKHOLDERS			57
TRANSACTIONS WITH SELLING STOCKHOLDERS AND OTHER RELATED PARTIES			59
DESCRIPTION OF CAPITAL STOCK			62
UNDERWRITING			64
WHERE YOU CAN FIND MORE INFORMATION			65
LEGAL MATTERS			66
EXPERTS			66
GLOSSARY OF INDUSTRY TERMS			67
INDEX TO FINANCIAL STATEMENTS			F-1

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	•	the level of oil and natural gas production;
	•	the level of oil and natural gas inventories;
	•	domestic and worldwide demand for oil and natural gas;
	•	the expected cost of developing new reserves;
	•	the cost of producing oil and natural gas;
	•	the level of drilling and producing activity;
	•	inclement weather;
	•	domestic and worldwide economic activity;
	•	regulatory and other federal and state requirements in the United States;
	•	the ability of the Organization of Petroleum Exporting Countries to set and maintain production levels and prices for oil;
	•	political conditions in or affecting oil and natural gas producing countries;
	•	terrorist activities in the United States and elsewhere;
	•	the cost of developing alternate energy sources;
	•	environmental regulation; and
	•	tax policies.

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	•	issuance of administrative, civil and criminal penalties;
	•	denial or revocation of permits or other authorizations;
	•	reduction or cessation in operations; and
	•	performance of site investigatory, remedial or other corrective actions.

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	•	we may not be able to continue to obtain insurance on commercially reasonable terms;
	•	we may be faced with types of liabilities that will not be covered by our insurance, such as damages from significant product liabilities and from environmental contamination;
	•	the dollar amount of any liabilities may exceed our policy limits; and
	•	we do not maintain coverage against the risk of interruption of our business.

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	•	our ability to obtain additional financing for working capital, acquisitions, capital expenditures and other purposes may be limited;
	•	a significant portion of our cash flow from operations may be dedicated to the payment of principal and interest on our debt, thereby reducing funds available for other purposes; and
	•	our significant leverage could make us more vulnerable to economic downturns.

	•	sell assets at disadvantageous prices;
	•	obtain additional financing; or
	•	refinance all or a portion of our indebtedness on terms that may be less favorable to us.

	•	comply with a minimum current ratio;
	•	maintain minimum levels of tangible net worth;
	•	not exceed specified levels of debt;
	•	comply with a debt service coverage ratio; and
	•	comply with a debt to tangible net worth ratio.

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	•	accurately assess the number of additional officers and employees we will require and the areas in which they will be required;
	•	attract, hire and retain additional highly skilled and motivated officers and employees;
	•	train and manage our work force in a timely and effective manner;
	•	upgrade and expand our office infrastructure so that it is appropriate for our level of activity; and
	•	improve our financial and management controls, reporting systems and procedures.

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	•	significant underperformance relative to expected historical or projected future operating results;
	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•	significant negative industry or economic trends;
	•	significant decline in our stock price for a sustained period; and
	•	our market capitalization relative to net book value.

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	•	directors will be elected for three-year terms, with approximately one-third of the board of directors standing for election each year;

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	•	cumulative voting is not allowed, which limits the ability of minority shareholders to elect any directors;
	•	the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all shares entitled to vote in the election of directors is required to change the size of the board of directors; and
	•	directors may be removed only for cause and only by holders of not less than 80% of the votes entitled to be cast on the matter.

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	•	$5.0 million to reduce bank indebtedness; and
	•	$27.0 million to $32.0 million for our 2006 capital expenditure budget; and
	•	the remainder for working capital and general corporate purposes.

	•	financial condition;
	•	results of operations;
	•	current and anticipated cash requirements;
	•	plans for expansion; and
	•	restrictions under our debt obligations,

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		Common Stock
		Low				High
		Year Ended
		December 31, 2003
First Quarter		$	3.70			$	4.30
Second Quarter			3.65				7.25
Third Quarter			5.45				6.75
Fourth Quarter			5.25				6.24

		Year Ended
		December 31, 2004
First Quarter		$	5.41			$	7.20
Second Quarter			7.20				10.04
Third Quarter			7.12				9.45
Fourth Quarter			8.07				9.43

		Year Ended
		December 31, 2005
First Quarter		$	9.08			$	11.11
Second Quarter			9.51				11.85
Third Quarter			11.55				36.00
Fourth Quarter			15.67				39.99

		Year Ending
		December 31, 2006
First Quarter (through March 2, 2006)		$	15.86			$	25.40

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				At December 31, 2005
				Actual				As Adjusted
				(unaudited)
				(in thousands)
Cash and cash equivalents				$	3,271			$	38,553
Long-term debt, including current maturities:
	Term notes payable to bank			$	24,905			$	19,905
	Revolving note payable to bank(1)				300				300
	Subordinated notes				3,000				3,000
		Total long-term debt			28,205				23,205
Stockholders’ equity:
	Preferred stock, $0.01 par value; 5,000 shares authorized				—				—
	Common stock, $0.01 par value; 30,000 shares authorized; 9,022 shares issued and outstanding, 11,490 shares issued and outstanding, as adjusted				90				115
	Additional paid-in capital				34,667				74,924
	Retained earnings				10,933				10,933
		Total stockholders’ equity			45,690				85,972
Total capitalization				$	73,895			$	109,177

(1)	On January 5, 2006, we entered into a Sixth Amended and Restated Loan Agreement with our bank lender. Under this agreement, our revolving line of credit was renewed, the maturity was extended from January 1, 2006 to December 1, 2006, and the principal amount we are able to borrow under this revolving facility was increased from $2.0 million to $10.0 million, subject to borrowing base limitations.

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	•	conditions in the oil and natural gas industry, including the demand for natural gas and fluctuations in the prices of oil and natural gas;
	•	competition among the various providers of compression services and products;
	•	changes in safety, health and environmental regulations;
	•	changes in economic or political conditions in the markets in which we operate;
	•	failure of our customers to continue to rent equipment after expiration of the primary rental term;
	•	the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters;
	•	our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with our substantial debt;
	•	future capital requirements and availability of financing;
	•	general economic conditions;
	•	events similar to September 11, 2001; and
	•	fluctuations in interest rates.

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				December 31,
				2005
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	3,271
	Trade accounts receivable, net of doubtful accounts of $75				6,192
	Inventory				14,723
	Prepaid expenses and other				456
		Total current assets			24,642
RENTAL EQUIPMENT, net of accumulated depreciation of $7,598					41,201
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,458					6,424
GOODWILL, net of accumulated amortization of $325					10,039
INTANGIBLES, net of accumulated amortization of $326					3,978
OTHER ASSETS					85
		Total assets		$	86,369
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Current portion of long-term debt			$	5,680
	Line of credit				300
	Accounts payable and accrued liabilities				5,124
	Deferred income				103
		Total current liabilities			11,207
LONG-TERM DEBT, less current portion					20,225
SUBORDINATED NOTES					2,000
DEFERRED TAX LIABILITY					7,247
COMMITMENTS
STOCKHOLDERS’ EQUITY:
	Common stock, 30,000 shares authorized, par value $0.01; 9,022 shares issued and outstanding				90
	Additional paid-in capital				34,667
	Retained earnings				10,933
		Total stockholders’ equity		$	45,690
		Total liabilities and stockholders’ equity		$	86,369

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				For the Year Ended
				December 31, 2005
REVENUE:
	Sales, net			$	30,278
	Service and maintenance income				2,424
	Rental income				16,609
		Total revenue			49,311
OPERATING COSTS AND EXPENSES:
	Cost of sales, exclusive of depreciation shown separately below				23,331
	Cost of service, exclusive of depreciation shown separately below				1,479
	Cost of rental, exclusive of depreciation shown separately below				6,528
	Selling expenses				1,034
	General and administrative				3,856
	Depreciation and amortization				4,224
		Total operating costs and expenses			40,452
OPERATING INCOME					8,859
OTHER INCOME (EXPENSE):
	Interest expense				(1,997	)
	Other income (expense)				199
		Total other income (expense)			(1,798	)
INCOME BEFORE PROVISION FOR INCOME TAXES					7,061
PROVISION FOR INCOME TAXES:
	Current				207
	Deferred				2,408
		Total income tax expense			2,615
NET INCOME					4,446
INCOME AVAILABLE TO COMMON STOCKHOLDERS				$	4,446
EARNINGS PER COMMON SHARE:
	Basic			$	0.59
	Diluted			$	0.52
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
	Basic				7,564
	Diluted				8,481

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						For the Year Ended
						December 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income					$	4,446
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization					4,224
		Deferred taxes					2,408
		Amortization of debt issuance costs					49
		Employee stock option expense					135
		Loss (gain) on disposal of assets					(28	)
		Changes in current assets:
			Trade and other receivables				(1,352	)
			Inventory				(5,699	)
			Prepaid expenses and other				(362	)
		Changes in current liabilities:
			Accounts payable and accrued liabilities				524
			Deferred income				(855	)
		Other assets					299
				Net cash provided by operating activities			3,789
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment						(17,708	)
	Assets acquired, net of cash						(7,584	)
	Proceeds from sale of property and equipment						264
	Change in restricted cash						2,000
				Net cash used in investing activities			(23,028	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from lines of credit						300
	Proceeds from long-term debt						21,517
	Repayments of long-term debt						(13,077	)
	Proceeds from exercise of stock options and warrants, net of transaction costs						13,085
				Net cash provided by financing activities			21,825
NET CHANGE IN CASH							2,586
CASH AT BEGINNING OF PERIOD							685
CASH AT END OF PERIOD						$	3,271

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																							Nine Months Ended
			Year Ended December 31,																				September 30,
			2000				2001				2002				2003				2004				2004				2005(1)
																							(unaudited)
			(in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF INCOME AND OTHER INFORMATION:
Revenues			$	3,652			$	8,762			$	10,297			$	12,750			$	15,958			$	11,220			$	35,532
Costs of revenue, exclusive of depreciation shown separately below				1,535				4,942				5,572				6,057				6,951				4,903				22,661
Gross profit				2,117				3,820				4,725				6,693				9,007				6,317				12,871
Depreciation and amortization				356				901				1,166				1,726				2,444				1,751				3,026
Other operating expenses				1,238				1,720				1,718				2,292				2,652				1,998				3,600
Operating income				523				1,199				1,841				2,675				3,911				2,568				6,245
Total other income (expense)(2)				(159	)			(503	)			(471	)			(671	)			603				916				(1,388	)
Income before income taxes				364				696				1,370				2,004				4,514				3,484				4,857
Income tax expense				147				314				584				697				1,140				774				1,797
Income before discontinued operations				217				382				786				1,307				3,374				2,710				3,060
Discontinued operations(3)				692				—				—				—				—				—				—
Net income				909				382				786				1,307				3,374				2,710				3,060
Preferred dividends				—				11				107				121				53				53				—
Net income available to common stockholders			$	909			$	371			$	679			$	1,186			$	3,321			$	2,657			$	3,060
Net income per common share:
	Basic		$	0.27			$	0.11			$	0.19			$	0.24			$	0.59			$	0.49			$	0.43
	Diluted		$	0.27			$	0.11			$	0.16			$	0.23			$	0.52			$	0.43			$	0.37
Weighted average shares of common stock outstanding:
	Basic			3,358				3,358				3,649				4,947				5,591				5,428				7,078
	Diluted			3,358				3,484				4,305				5,253				6,383				6,217				8,213
EBITDA(4)			$	927			$	2,523			$	3,511			$	4,397			$	7,796			$	5,815			$	9,322

		As of December 31,																				As of
																						September 30,
		2000				2001				2002				2003				2004				2005
																						(unaudited)
		(in thousands)
BALANCE SHEET INFORMATION:
Current assets		$	1,893			$	3,248			$	5,084			$	3,654			$	7,295			$	27,230
Total assets			8,009				18,810				23,937				28,270				43,255				85,583
Long-term debt (including current portion)			2,644				10,009				8,847				10,724				15,017				28,013
Stockholders’ equity			4,387				5,781				13,001				14,425				22,903				43,897

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(1)	The information for the periods presented may not be comparable because of our acquisition of SCS in January 2005. For additional information regarding this acquisition, you should read the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Transactions with Selling Stockholders and Other Related Parties — Acquisition of Screw Compression Systems, Inc.” in this prospectus.
(2)	Total other income (expense) for the year ended December 31, 2004 and the nine months ended September 30, 2004 includes $1.5 million in life insurance proceeds paid to us upon the death of our former Chief Executive Officer.
(3)	On March 31, 2000, we disposed of a former subsidiary, CNG Engine Co., or “CNG,” through a transfer of all of the common stock of CNG to the former owner of CNG in exchange for 692,368 shares of common stock of Natural Gas Services Group held by the former owner and a promissory note from the former owner in the amount of $350,000. During the year ended December 31, 2000, the former owner defaulted on all payments due to us under the note, and the entire amount was reserved and reflected as a reduction in the gain from discontinued operations.
(4)	“EBITDA” is a non-GAAP financial measure of earnings (net income) from continuing operations before interest, taxes, depreciation, and amortization. This term, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. However, management believes EBITDA is useful to an investor in evaluating our operating performance because:

	•	it is widely used by investors in the energy industry to measure a company’s operating performance without regard to items excluded from the calculation of EBITDA, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
	•	it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating structure; and
	•	it is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, as a basis for strategic planning and forecasting, and as a component for setting incentive compensation.

	There are material limitations to using EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies. The following table reconciles EBITDA to our net income, the most directly comparable GAAP financial measure:

																						Nine Months Ended
		Year Ended December 31,																				September 30,
		2000				2001				2002				2003				2004				2004				2005
																						(unaudited)				(unaudited)
		(in thousands)
EBITDA		$	927			$	2,523			$	3,511			$	4,397			$	7,796			$	5,815			$	9,322
Depreciation and amortization			356				903				1,166				1,726				2,444				1,751				3,026
Interest expense, net			207				924				975				667				838				580				1,439
Income taxes			147				314				584				697				1,140				774				1,797
Discontinued operations			(692	)			—				—				—				—				—				—
Net income		$	909			$	382			$	786			$	1,307			$	3,374			$	2,710			$	3,060

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		Year Ended												Nine Months Ended
		December 31,												September 30,
		2002				2003				2004				2004				2005
														(unaudited)
		(in thousands)
Sales		$	4,336			$	3,865			$	3,593			$	2,445			$	22,066
Service and maintenance			1,563				1,773				1,874				1,370				1,770
Rental			4,398				7,112				10,491				7,405				11,696
Total		$	10,297			$	12,750			$	15,958			$	11,220			$	35,532

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		Revenue																Gross Profit
		Nine Months Ended																Nine Months Ended
		September 30,																September 30,
		2004								2005								2004								2005
		unaudited
		(dollars in thousands)
Sales		$	2,445				22%			$	22,066				62%			$	746				31%			$	5,089				23%
Service and maintenance			1,370				12%				1,770				5%				340				25%				625				35%
Rental			7,405				66%				11,696				33%				5,231				71%				7,157				61%
Total		$	11,220							$	35,532							$	6,317				56%			$	12,871				36%

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			Revenue																Gross Profit
			Year Ended December 31,																Year Ended December 31,
			2003								2004								2003								2004
			(dollars in thousands)
Sales			$	3,865				30%			$	3,593				23%			$	1,005				26%			$	1,037				29%
Service and maintenance				1,773				14%				1,874				11%				530				30%				517				28%
Rental				7,112				56%				10,491				66%				5,158				73%				7,453				71%
	Total		$	12,750							$	15,958							$	6,693				53%			$	9,007				56%

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			Revenue																Gross Profit
			Year Ended December 31,																Year Ended December 31,
			2002								2003								2002								2003
			(dollars in thousands)
Sales			$	4,336				42%			$	3,865				30%			$	1,258				29%			$	1,005				26%
Service and maintenance				1,563				15%				1,773				14%				236				15%				530				30%
Rental				4,398				43%				7,112				56%				3,231				73%				5,158				73%
	Total		$	10,297							$	12,750							$	4,725				46%			$	6,693				52%

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	•	revenue recognition;
	•	estimating the allowance for doubtful accounts;
	•	accounting for income taxes;
	•	valuation of long-lived and intangible assets and goodwill; and
	•	valuation of inventory

	Revenue Recognition

	Allowance for Doubtful Accounts Receivable

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	Accounting for Income Taxes

	Valuation of Long-Lived and Intangible Assets and Goodwill

	•	significant underperformance relative to expected historical or projected future operating results;
	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and
	•	significant negative industry or economic trends.

	Inventories

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	Contractual Obligations and Commitments

			Obligation Due in Period
																							After
Cash Contractual Obligations			2005(1)				2006				2007				2008				2009				5 Years				Total
			(in thousands)
Credit facility (secured)			$	1,166			$	4,623			$	4,623			$	4,622			$	4,623			$	5,356			$	25,013
Interest on credit facility				478				1,706				1,357				980				573				144				5,238
Subordinated debt				—				1,000				1,000				1,000				—				—				3,000
Facilities and office leases				52				146				129				62				29				134				552
Purchase obligations				—				—				—				—				—				—				—
	Total		$	1,696			$	7,475			$	7,109			$	6,664			$	5,225			$	5,634			$	33,803

(1)	For the three months ended December 31, 2005.

	Senior Bank Borrowings

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	•	at the end of each month, a consolidated current ratio (as defined in the Loan Agreement) of at least 1.4 to 1.0;
	•	at the end of each month, consolidated tangible net worth (as defined in the Loan Agreement) of at least $14.5 million;
	•	at the end of each fiscal quarter, a debt service coverage ratio (as defined in the Loan Agreement) of at least 1.25 to 1.00; and
	•	at the end of each month, a ratio of consolidated debt to consolidated tangible net worth (as such terms are defined in the Loan Agreement) of less than 1.5 to 1.0.

	Subordinated Debt and Related Letters of Credit

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		Actual
														Budgeted 2006
Expenditure Category		2003				2004				2005				(excluding acquisitions)
										(unaudited)
		(in thousands)
Rental equipment, vehicles and shop equipment		$	7,882			$	11,596			$	17,708			$	27,000 to $32,000

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	•	the increasing demand for and limited supply of energy, both domestically and abroad;
	•	continued non-conventional gas exploration and production;
	•	environmental considerations which provide strong incentives to use natural gas in place of other carbon fuels;
	•	the cost savings of using natural gas rather than electricity for heat generation;
	•	implementation of international environmental and conservation laws;
	•	the aging of producing natural gas reserves worldwide; and
	•	the extensive supply of undeveloped natural gas reserves.

	•	Compression fabrication. Fabrication involves the assembly of compressor components manufactured by us or other third parties into compressor units that are ready for rental or sale. In addition

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		to fabricating compressors for our rental fleet, we engineer and fabricate natural gas compressors for sale to customers to meet their specifications based on well pressure, production characteristics and the particular applications for which compression is sought.
	•	Compressor manufacturing. We design and manufacture our own proprietary line of reciprocating compressor frames, cylinders and parts known as our “CiP”, or Cylinder-in-Plane, product line. We use the finished components to fabricate compressor units for our rental fleet or for sale to third parties. We also sell finished components to other fabricators.
	•	Flare fabrication. We design, fabricate, sell, install and service flare stacks and related ignition and control devices for the onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. Applications for this equipment are often environmentally and regulatory driven, and we believe we are a leading supplier to this market.
	•	Parts sales and compressor rebuilds. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this part of our business.

	•	Expand rental fleet. With a portion of the proceeds from this offering and using the additional fabrication capacity gained with the SCS acquisition, we intend to increase our market share by expanding our rental fleet 30% to 40% by the end of 2006. We believe our growth will continue to be primarily driven through our placement of small to medium horsepower wellhead natural gas compressors for non-conventional natural gas production, which is the single largest and fastest growing segment of U.S. natural gas production business according to data from the Energy Information Administration. As of December 31, 2005, we had 820 natural gas compressors rented to third parties.
	•	Operational expansion. With the planned increase in our rental fleet, we intend to expand our operations in existing areas, as well as pursue focused expansion into new geographic regions. We have recently entered new markets in Appalachia and the Rocky Mountains.
	•	Expand CiP (Cylinder-in-Plane) product line. The CiP, or Cylinder-in-Plane, is our proprietary reciprocating compressor product line. This product line has allowed us to expand our compressor rentals and sales into higher pressure natural gas gathering and transmission lines. We intend to establish new distributorship relationships and after-market sales and services networks.
	•	Selectively pursue acquisitions. We intend to evaluate potential acquisitions that would provide us with access to new markets or enhance our current market position.

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	•	Superior customer service. Our emphasis on the small to medium horsepower markets has enabled us to effectively meet the evolving needs of our customers. We believe these markets have been under-serviced by our larger competitors which, coupled with our personalized services and in-depth knowledge of our customers’ operating needs and growth plans, have allowed us to enhance our relationships with existing customers as well as attract new customers. The size, type and geographic diversity of our rental fleet enables us to provide customers with a range of compression units that can serve a wide variety of applications. We are able to select the correct equipment for the job, rather than the customer trying to fit its application to our equipment.
	•	Diversified product line. Our compressors are available as high and low pressure rotary screw and reciprocating packages. They are designed to meet a number of applications, including wellhead production, natural gas gathering, natural gas transmission, vapor recovery and gas and plunger lift. In addition, our compressors can be built to handle a variety of gas mixtures, including air, nitrogen, carbon dioxide, hydrogen sulfide and hydrocarbon gases. A diversified product line helps us compete by being able to satisfy widely varying pressure, volume and production conditions that customers encounter.
	•	Purpose built rental compressors. Our rental compressor packages have been designed and built to address the primary requirements of our customers in the producing regions in which we operate. Our units are compact in design and are easy, quick and inexpensive to move, install and start-up. Our control systems are technically advanced and allow the operator to start and stop our units remotely and/or in accordance with well conditions. We believe our rental fleet is also one of the newest with an average age of less than three years old.
	•	Experienced management team. On average, our executive and operating management team has over 20 years of oilfield services industry experience. We believe our management team has successfully demonstrated its ability to grow our business both organically and through selective acquisitions.
	•	Broad geographic presence. We presently provide our products and services to a customer base of oil and natural gas exploration and production companies operating in New Mexico, Texas, Michigan, Colorado, Wyoming, Utah, Oklahoma, Pennsylvania, West Virginia and Kansas. Our footprint allows us to service many of the natural gas producing regions in the United States. We believe that operating in diverse geographic regions allows us better utilization of our compressors, minimal incremental expenses, operating synergies, volume-based purchasing, leveraged inventories and cross-trained personnel.
	•	Long-standing customer relationships. We have developed long-standing relationships providing compression equipment to many major and independent oil and natural gas companies. Our customers generally continue to rent our compressors after the expiration of the initial terms of our rental agreements, which we believe reflects their satisfaction with the reliability and performance of our services and products.

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	•	owners and operators of sites,
	•	persons who disposed of or arranged for the disposal of “hazardous substances” found at sites.

	•	the prevention of discharges, including oil and produced water spills, and
	•	liability for drainage into waters.

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						Square
Location		Status				Feet				Uses
Tulsa, Oklahoma			Owned and Leased				91,780	(1)		Executive offices of SCS and compressor fabrication, manufacturing, rental and services
Midland, Texas			Owned				24,600			Compressor fabrication, rental and services
Lewiston, Michigan			Owned				15,360			Compressor fabrication, rental and services
Bridgeport, Texas			Leased				4,500			Office and parts and services
Midland, Texas			Owned				4,100			Executive offices and parts and services
Bloomfield, New Mexico			Leased				4,672			Office and parts and services
							145,012

(1)	Includes 52,780 square feet owned by SCS on which its executive offices are located and on which compressor fabrication, rental and service operations are conducted; 19,500 square feet leased by SCS for manufacturing CiP compressors; and 19,500 square feet leased by SCS for compressor fabrication.

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Name		Age				Position
Stephen C. Taylor			52			Chairman, President and Chief Executive Officer
Earl R. Wait			62			Vice President — Accounting and Treasurer
Paul D. Hensley			53			Director, President of SCS
S. Craig Rogers			43			Vice President — Operations
William R. Larkin			40			Vice President — Sales and Marketing
James R. Hazlett			50			Vice President — Technical Services
Ronald D. Bingham			61			Vice President — Northern Operations
Scott W. Sparkman			44			Secretary and Assistant Treasurer
Charles G. Curtis(1)(2)(3)			72			Director
William F. Hughes, Jr.(1)(2)(3)			53			Director
Gene A. Strasheim(1)(2)(3)			65			Director
Richard L. Yadon(1)(2)(3)			47			Director

(1)	Member of our audit committee
(2)	Member of our compensation committee
(3)	Member of our nominating committee

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	•	assisting the Board in fulfilling its oversight responsibilities as they relate to our accounting policies, internal controls, financial reporting practices and legal and regulatory compliance;
	•	hiring independent auditors;
	•	monitoring the independence and performance of our independent auditors;
	•	maintaining, through regularly scheduled meetings, a line of communication between the Board, our financial management and independent auditors; and
	•	overseeing compliance with our policies for conducting business, including ethical business standards.

	•	assisting the Board in overseeing the management of our human resources, including compensation and benefits programs and evaluating the performance and compensation of our chief executive officer; and
	•	overseeing the evaluation of management.

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	•	identifying individuals qualified to become board members, consistent with the criteria approved by the Board;
	•	recommending director nominees and individuals to fill vacant positions;
	•	assisting the Board in interpreting the Board Governance Guidelines, the Board’s Principles of Conduct and any other similar governance documents adopted by the Board;
	•	overseeing the evaluation of the Board and its committees;
	•	generally overseeing the governance of the Board; and
	•	overseeing executive development and succession and diversity efforts.

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															Long-Term Compensation
							Annual Compensation								Awards
															Restricted				Securities
															Stock				Underlying				All Other
Name and Principal Position			Year				Salary ($)				Bonus ($)				Awards ($)				Options/SARs (#)				Compensation ($)(1)
Stephen C. Taylor				2005	(2)			149,462				69,750				—				45,000				3,726
	Chairman, President and Chief Executive Officer
Wallace C. Sparkman				2005				121,027	(3)			44,000				—				—				—
	Former Director,			2004				120,000				53,500				—				—				—
	Chairman and Chief Executive Officer
Paul D. Hensley				2005	(4)			129,681				50,680				—				—				6,772
	Director, President of SCS
Earl R. Wait				2005				94,720				35,000				—				—				4,326
	Vice President —			2004				90,000				40,250				—				—				6,135
	Accounting			2003				90,000				41,256				—				—				3,600
James R. Hazlett				2005	(5)			105,000				36,750				—				—				—
	Vice President —
	Technical Services
S. Craig Rogers				2005				98,764				35,000				—				—				4,270
	Vice President —			2004				95,000				42,750				—				—				3,980
	Operations			2003				88,500				37,669				—				—				3,444

(1)	The amounts shown represent voluntary contributions made by Natural Gas Services Group to the 401(k) Plan in which all employees are generally eligible to participate.
(2)	Mr. Taylor was first employed by us on January 13, 2005.
(3)	On January 1, 2004, we employed Mr. Sparkman as our Director of Investor Relations. He served in this capacity until March 2004 when he was elected to serve as interim President and Chief Executive Officer following the death of Mr. Vinson. The salary paid to Mr. Sparkman during 2004 was paid under an oral arrangement between Mr. Sparkman and us. As a result of Mr. Taylor’s employment by us and the increase in his responsibilities following his employment, Mr. Sparkman’s annual salary was reduced to $110,000 in August 2005. Mr. Sparkman retired from his employment with us and as Chairman effective as of December 31, 2005.
(4)	When we acquired SCS on January 3, 2005, Mr. Hensley retained and has continued in his position as President of SCS.
(5)	Mr. Hazlett became an executive officer in June 2005.

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Potential Realizable

Individual Grants

Value at Assumed

Annual Rates of

Number of

Percent of Total

Stock Price

Securities

Options/SARs

Appreciation for

Underlying

Granted to

Exercise or

Option Term (1)

Options/SARs

Employees in

Base Price

Name

Granted (#)

Fiscal Year

($/Sh)

Expiration Date

5%($)

10%($)

Stephen C. Taylor

45,000

(2)

100

%

9.22

August 24, 2015

260,929

661,244

(1)	These amounts are calculated based on the indicated annual rates of appreciation and annual compounding from the date of grant to the end of the option term. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock and overall stock market conditions. There is no assurance that the amounts reflected in this table will be achieved.
(2)	A nonstatutory stock option to purchase 45,000 shares of common stock was granted to Mr. Taylor on August 24, 2005. The option is exercisable in three equal annual installments, commencing on January 13, 2006. For additional information about the stock option granted to Mr. Taylor and our compensation agreement with him, you should refer to “— Compensation Agreements with Management” below.

										Number of Unexercised								Value of Unexercised
										Securities Underlying								In-the-Money
										Options/SARs at								Options/SARs at
		Shares				Value				Fiscal Year End								Fiscal Year End ($)(2)
		Acquired				Realized(1)
Name		On Exercise				($)				Exercisable				Unexercisable				Exercisable				Unexercisable
Stephen C. Taylor			—				—				—				45,000				—				348,300
Wallace C. Sparkman			—				—				—				—				—				—
Paul D. Hensley			—				—				—				—				—				—
Earl R. Wait			—				—				15,000				—				205,650				—
James R. Hazlett			—				—				—				—				—				—
S. Craig Rogers			—				—				12,000				—				164,520				—

(1)	The value realized is equal to the fair market value of a share of common stock on the date of exercise, less the exercise price of the stock options exercised.
(2)	The value of in-the-money options is equal to the fair market value of a share of common stock at fiscal year-end ($16.96 per share), based on the closing price of the common stock, less the exercise price.

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Number of Securities

Remaining Available for

Number of Securities to

Weighted-average

Future Issuance Under

be Issued Upon Exercise

Exercise Price of

Equity Compensation Plans

of Outstanding Options,

Outstanding Options,

(Excluding Securities

Plan Category

Warrants and Rights

Warrants and Rights

Reflected in Column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

101,668

$

7.01

9,500

Equity compensation plans not approved by security holders

99,028

$

5.61

—

Total

200,696

$

6.32

9,500

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														Shares Owned After Offering
		Shares Owned								Shares
		Prior to Offering								Being				Shares				%
										Offered				Beneficially				Beneficially
		Shares				%				Pursuant				Owned Upon				Owned Upon
		Beneficially				Beneficially				to this				Completion of				Completion of
Name		Owned(1)				Owned(1)				Prospectus				this Offering				this Offering
Selling Stockholders:
James R. Hazlett			60,976	(2)			*				10,000				50,976				*
Paul D. Hensley			426,829	(3)			4.73	%			100,000				326,829				2.84	%
William F. Hughes			249,500	(4)			2.76	%			50,000				199,500				1.73	%
Scott W. Sparkman			516,134	(5)			5.70	%			50,000				466,134				4.04	%
Wallace C. Sparkman			167,691	(6)			1.86	%			150,000				17,691				*
Tony Vohjesus			121,951	(7)			1.35	%			22,000				99,951				*
Total Number of Shares to be Sold by Selling Stockholders:											382,000
Other Officers and Directors:
Charles G. Curtis			83,000	(8)			*				—				83,000				*
Gene A. Strasheim			8,500	(9)			*				—				8,500				*
Stephen C. Taylor			15,000	(10)			*				—				15,000				*
Richard L. Yadon			276,683	(11)			3.06	%			—				276,683				2.40	%
Ronald D. Bingham			4,000	(12)			*				—				4,000				*
William R. Larkin			—	(13)			—				—				—				—
S. Craig Rogers			14,125	(14)			*				—				14,125				*
Earl R. Wait			45,520	(15)			*				—				45,520				*
All directors and executive officers as a group (12 persons)			1,700,267	(16)			18.51	%			210,000				1,490,267				12.79	%
Other Stockholders:
Charles L. Barney			490,800	(17)			5.43	%			—				490,800				4.27	%

	*	Less than one percent

	(1)	The number of shares listed includes all shares of common stock owned by, or which may be acquired within 60 days of February 13, 2006 upon the exercise of warrants and options held by the stockholder (or group). Beneficial ownership is calculated in accordance with the rules of the Securities and Exchange Commission.
	(2)	Mr. Hazlett’s address is 2911 South County Road 1260, Midland, Texas 79706.
	(3)	Mr. Hensley’s address is 3005 N. 15th Street, Broken Arrow, Oklahoma 74012.
	(4)	Includes 240,500 shares indirectly owned by Mr. Hughes through the William and Cheryl Hughes Family Trust and 7,500 shares that may be acquired upon the exercise of stock options granted under our 1998 Stock Option Plan. Mr. and Mrs. Hughes are co-trustees of the William and Cheryl Hughes Family Trust and have shared voting and investment powers with respect to the shares held

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		by the trust. Mr. and Mrs. Hughes are beneficiaries of the trust along with their two children. Of the shares beneficially owned by Mr. Hughes, 50,000 shares are being offered pursuant to this prospectus by the William and Cheryl Hughes Family Trust. Mr. Hughes’ address is 42921 Normandy Lane, Lancaster, California 93536.
	(5)	Includes 167 shares indirectly owned by Mr. Sparkman through our 401(k) Plan; 21,467 shares that may be acquired upon the exercise of warrants; 1,000 shares that may be acquired upon the exercise of a stock option granted under our 1998 Stock Option Plan; and 475,000 shares held in the Diamond SDGT Trust, a trust for which Mr. Sparkman is sole trustee and a co-beneficiary with his sister. Of the shares beneficially owned by Mr. Sparkman, 50,000 shares are being offered pursuant to this prospectus by the Diamond SDGT Trust. Mr. Sparkman’s address is 2911 South County Road 1260, Midland, Texas 79706.
	(6)	Includes 105,691 shares indirectly owned by Mr. Sparkman through Diamente Investments, L.P., a Texas limited partnership of which Mr. Sparkman is a general and limited partner. Of the shares beneficially owned by Mr. Sparkman, 100,000 shares are being offered pursuant to this prospectus by Diamente Investments, L.P. Mr. Sparkman’s address is 4906 Oakwood Court, Midland, Texas 79707.
	(7)	Mr. Vohjesus’ address is 5725 Bird Creek Avenue, Catoosa, Oklahoma 74015.
	(8)	Includes 40,000 shares that may be acquired upon the exercise of warrants and 10,000 shares that may be acquired upon the exercise of stock options granted under our 1998 Stock Option Plan. Mr. Curtis’ address is 1 Penrose Lane, Colorado Springs, Colorado 80906.
	(9)	Includes 5,000 shares that may be acquired upon exercise of stock options granted under our 1998 Stock Option Plan. Mr. Strasheim’s address is 165 Huntington Place, Colorado Springs, Colorado 80906.

(10)	Includes 15,000 shares that may be acquired upon exercise of a stock option granted to Mr. Taylor as an inducement for his employment. Mr. Taylor’s address is 2911 South County Road 1260, Midland, Texas 79706.
(11)	Includes 14,683 shares that may be acquired upon the exercise of warrants and 7,500 shares that may be acquired upon the exercise of stock options granted under our 1998 Stock Option Plan. Mr. Yadon’s address is 4444 Verde Glen Ct., Midland, Texas 79707.
(12)	Includes 4,000 shares that may be acquired upon the exercise of a stock option granted under our 1998 Stock Option Plan. Mr. Bingham’s address is 3690 County Road 491, Lewiston, Michigan 49756.
(13)	Mr. Larkin’s address is 2911 South County Road 1260, Midland, Texas 79706.
(14)	Includes 12,000 shares that may be acquired upon the exercise of a stock option granted under our 1998 Stock Option Plan. Mr. Rogers’ address is 2911 South County Road 1260, Midland, Texas 79706.
(15)	Includes 15,000 shares that may be acquired upon exercise of a stock option granted under our 1998 Stock Option Plan. Mr. Wait’s address is 2911 South County Road 1260, Midland, Texas 79706.
(16)	Includes 77,000 shares of common stock that may be acquired upon the exercise of stock options and 76,150 shares that may be acquired upon the exercise of warrants to purchase common stock.
(17)	Based on Amendment No. 4 to Schedule 13D filed with the SEC on January 24, 2006, Charles L. Barney, the sole indirect owner of CBarney Investments, Ltd. and Mark X Energy Company, reported beneficial ownership of 490,800 shares of common stock. Mr. Barney reported shared voting and dispositive power with (i) CBarney Investments, Ltd. with respect to the 89,698 shares it owns and (ii) Mark X Energy Company with respect to the 401,102 shares it owns, due to his ownership control of those entities. The address of Charles L. Barney, CBarney Investments, Ltd. and Mark X Energy Company is 952 Echo Lane, Suite 364, Houston, Texas 77024.

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	•	the issuance or sale of securities to our employees, officers, directors, or consultants for the primary purpose of soliciting or retaining their employment or service pursuant to a stock option plan (or similar equity incentive plan) approved by the Board of Directors and our stockholders;
	•	the conversion of any convertible or exercisable securities outstanding as of the closing;
	•	our issuance of shares of common stock in connection with an underwritten public offering; or
	•	the issuance of securities in connection with mergers, acquisitions, strategic business partnerships or joint ventures.

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		Number of Shares				Amount of Debt
Name		Underlying Warrants				Guaranteed
Wallace O. Sellers(1)			21,936			$	548,399
Wallace C. Sparkman			21,467	(2)		$	536,671
CAV-RDV, Ltd.(3)			15,756			$	393,902
Richard L. Yadon			9,365			$	234,121

(1)	Mr. Sellers served as a Director from December 1998 until June 2005 after declining to stand for re-election at the 2005 annual meeting of stockholders because of health reasons.
(2)	Mr. Sparkman transferred such warrants to Diamond S DGT Trust, a trust of which Scott W. Sparkman is the trustee and a beneficiary. Mr. Sparkman has represented to us that he has no beneficial interest in Diamond S DGT Trust.
(3)	CAV-RDV, Ltd. is a limited partnership that was controlled by Wayne L. Vinson, our former President and Chief Executive Officer.

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		Number of Shares				Amount of
Name		Underlying Warrants				Debt Guaranteed
Wallace O. Sellers			9,032			$	451,601
CAV-RDV, Ltd.			2,122			$	106,098
Richard L. Yadon			5,318			$	265,879

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	•	directors will be elected for staggered three-year terms, with approximately one-third of the board of directors standing for election each year, and the staggered term provision cannot be amended or repealed without the affirmative vote of the holders of at least 80% of the votes entitled to be cast in the election of directors;

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	•	the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all shares entitled to vote in the election of directors is required to change the size of the board of directors; and
	•	directors may be removed only for cause and only by holders of not less than 80% of the votes entitled to be cast on the matter at a special meeting of the stockholders expressly called for that purpose.

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		Per Share				Total
						Without Option				With Option
Underwriting discount paid by us		$	1.01			$	2,483,425			$	2,913,597
Underwriting discount paid by selling stockholders		$	1.01			$	384,388			$	384,388

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		Page
NATURAL GAS SERVICES GROUP, INC.
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheet as of December 31, 2004			F-3
Consolidated Statements of Income for the Years Ended December 31, 2003 and December 31, 2004			F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2003 and December 31, 2004			F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and December 31, 2004			F-6
Notes to Consolidated Financial Statements			F-7
Report of Independent Registered Public Accounting Firm			F-20
Consolidated Balance Sheet as of December 31, 2003			F-21
Consolidated Statements of Income for the Years Ended December 31, 2002 and December 31, 2003			F-22
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2002 and December 31, 2003			F-23
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and December 31, 2003			F-24
Notes to Consolidated Financial Statements			F-25
Condensed Consolidated Balance Sheet as of September 30, 2005 (unaudited)			F-37
Condensed Consolidated Income Statements for the Nine Months Ended September 30, 2004 and September 30, 2005 (unaudited)			F-38
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and September 30, 2005 (unaudited)			F-39
Notes to Condensed Consolidated Financial Statements (Unaudited)			F-40
SCREW COMPRESSION SYSTEMS, INC.
Report of Independent Registered Public Accounting Firm			F-46
Consolidated Balance Sheet as of December 31, 2004			F-47
Consolidated Statements of Income for the Years Ended December 31, 2003 and December 31, 2004			F-48
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2003 and December 31, 2004			F-49
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and December 31, 2004			F-50
Notes to Consolidated Financial Statements			F-51
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2004			F-56

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	/s/ Hein & Associates llp

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				December 31,
				2004
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	685
	Trade accounts receivable, net of doubtful accounts of $25				1,999
	Inventory				4,470
	Prepaid expenses and other				141
		Total current assets			7,295
RENTAL EQUIPMENT, net of accumulated depreciation of $4,827					27,734
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,446					3,134
GOODWILL, net of accumulated amortization of $325					2,590
PATENTS, net of accumulated amortization of $165					86
RESTRICTED CASH					2,000
OTHER ASSETS					416
		Total assets		$	43,255
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Current portion of long-term debt			$	3,728
	Line of credit				550
	Accounts payable and accrued liabilities				2,355
	Deferred income				22
		Total current liabilities			6,655
LONG-TERM DEBT, less current portion					9,290
SUBORDINATED NOTES, net of discount of $90					1,449
DEFERRED TAX LIABILITY					2,958
COMMITMENTS (Note 11)
STOCKHOLDERS’ EQUITY:
	Preferred stock, 5,000 shares authorized, no shares issued				—
	Common stock, 30,000 shares authorized, par value $0.01; 6,104 shares issued and outstanding				61
	Additional paid-in capital				16,355
	Retained earnings				6,487
		Total stockholders’ equity			22,903
		Total liabilities and stockholders’ equity		$	43,255

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				For the Years Ended
				December 31,
				2003				2004
REVENUE:
	Sales, net			$	3,865			$	3,593
	Service and maintenance income				1,773				1,874
	Rental income				7,112				10,491
		Total revenue			12,750				15,958
OPERATING COSTS AND EXPENSES:
	Cost of sales, exclusive of depreciation shown separately below				2,860				2,556
	Cost of service, exclusive of depreciation shown separately below				1,243				1,357
	Cost of rental, exclusive of depreciation shown separately below				1,954				3,038
	Selling expenses				679				875
	General and administrative				1,613				1,777
	Depreciation and amortization				1,726				2,444
		Total operating costs and expenses			10,075				12,047
OPERATING INCOME					2,675				3,911
OTHER INCOME (EXPENSE):
	Interest expense				(667	)			(838	)
	Other income (expense)				(4	)			1,441
		Total other income (expense)			(671	)			603
INCOME BEFORE PROVISION FOR INCOME TAXES					2,004				4,514
PROVISION FOR INCOME TAXES:
	Current				25				20
	Deferred				672				1,120
		Total income tax expense			697				1,140
NET INCOME					1,307				3,374
PREFERRED DIVIDENDS					121				53
INCOME AVAILABLE TO COMMON STOCKHOLDERS				$	1,186			$	3,321
EARNINGS PER COMMON SHARE:
	Basic			$	0.24			$	0.59
	Diluted			$	0.23			$	0.52
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
	Basic				4,947				5,591
	Diluted				5,253				6,383

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		Preferred Stock								Common Stock								Additional								Total
																		Paid-in				Retained				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Earnings				Equity
BALANCES, January 1, 2003			382			$	4				4,858			$	49			$	10,968			$	1,980			$	13,001
Exercise of common stock options and warrants			—				—				135				1				237				—				238
Conversion of preferred stock to common stock			(38	)			—				38				—				—				—				—
Dividends on preferred stock			—				—				—				—				—				(121	)			(121	)
Net income			—				—				—				—				—				1,307				1,307
BALANCES, January 1, 2004			344				4				5,031				50				11,205				3,166				14,425
Exercise of common stock options and warrants			—				—				80				1				245				—				246
Conversion of preferred stock to common stock			(344	)			(4	)			344				4				—				—				—
Transaction costs of private placement of common stock			—				—				—				—				(39	)			—				(39	)
Issuance of common stock			—				—				649				6				4,944				—				4,950
Dividends on preferred stock			—				—				—				—				—				(53	)			(53	)
Net income			—				—				—				—				—				3,374				3,374
BALANCES, December 31, 2004			—			$	—				6,104			$	61			$	16,355			$	6,487			$	22,903

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						For the Years Ended
						December 31,
						2003				2004
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income					$	1,307			$	3,374
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization					1,726				2,444
		Deferred taxes					672				1,120
		Amortization of debt issuance costs					65				65
		Loss on disposal of assets					18				71
		Changes in current assets:
			Trade and other receivables				(392	)			(1,182	)
			Inventory				(1,078	)			(1,915	)
			Prepaid expenses and other				66				(34	)
		Changes in current liabilities:
			Accounts payable and accrued liabilities				543				1,284
			Deferred income				174				(185	)
		Other changes					(77	)			(344	)
				Net cash provided by operating activities			3,024				4,698
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment						(7,882	)			(11,596	)
	Proceeds from sale of property and equipment						120				50
	Increase in restricted cash						—				(2,000	)
	Distribution from equity method investment						108				—
	Decrease in lease receivable						210				—
				Net cash used in investing activities			(7,444	)			(13,546	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from lines of credit						300				550
	Proceeds from long-term debt						3,479				6,592
	Repayments of long-term debt						(2,014	)			(2,589	)
	Repayment of line of credit						—				(300	)
	Dividends on preferred stock						(121	)			(53	)
	Proceeds from sale of stock and exercise of stock options and warrants, net of transaction costs						238				5,157
				Net cash provided by financing activities			1,882				9,357
NET CHANGE IN CASH							(2,538	)			509
CASH, beginning of year							2,714				176
CASH, end of year						$	176			$	685
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Interest paid					$	667			$	775
	Income taxes paid					$	35			$	31

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1.	Summary of Significant Accounting Policies

	•	Rotary Gas Systems, Inc. (“RGS”) (a Texas corporation) was engaged in the manufacturing and distribution of natural gas compressor packages for use in the petroleum industry and natural gas flare stacks and ignition systems for use in oilfield, refinery, petrochemical plant, and landfill applications in New Mexico, California and Texas.
	•	NGE Leasing, Inc. (“NGE”) (a Texas corporation) was engaged in leasing natural gas compressor packages to entities in the petroleum industry and irrigation motor units to entities in the agricultural industry. NGE’s leasing income is concentrated in New Mexico, California and Texas.
	•	Great Lakes Compression, Inc., (“GLC”) (a Colorado corporation) was formed in March 2001 and acquired the assets and certain operations of a business that fabricates, rents, and services natural gas compressors to producers of oil and natural gas, primarily in Michigan.

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Raw materials		$	3,034
Work in process			1,436
		$	4,470

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				Year Ended
				December 31,
				2003				2004
Numerator:
	Net income			$	1,307			$	3,374
	Less preferred dividends				121				53
	Income available to common stockholders				1,186				3,321
Denominator for basic net income per share:
	Weighted average common shares outstanding				4,947				5,591
Denominator for diluted net income per share:
	Weighted average common shares outstanding				4,947				5,591
	Dilutive effect of stock options and warrants				306				792
		Diluted weighted average shares			5,253				6,383
Earnings per share:
	Basic			$	0.24			$	0.59
	Diluted			$	0.23			$	0.52

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		Years Ended
		December 31
		2003				2004
Net income		$	1,307			$	3,374
Less preferred dividends			121				53
Income available to common stockholders			1,186				3,321
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards (net of tax)			(39	)			(38	)
Net income, pro forma		$	1,147			$	3,283
Net income per share:
Basic, as reported		$	0.24			$	0.59
Basic, pro forma		$	0.23			$	0.59
Diluted, as reported		$	0.23			$	0.52
Diluted, pro forma		$	0.21			$	0.51
Weighted average fair value of options granted during the year		$	3.35			$	4.75

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2.	Property and Equipment

Land and building		$	1,346
Leasehold improvements			207
Office equipment and furniture			200
Software			143
Machinery and equipment			507
Vehicles			2,177
Less accumulated depreciation			(1,446	)
		$	3,134

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3.	Acquisitions

	•	$8 million in cash;
	•	promissory notes issued by Natural Gas Services in the aggregate principal amount of $3 million bearing interest at the rate of 4.00% per annum, maturing three years from the date of closing and secured by a letter of credit in the face amount of $2 million; and
	•	609,756 shares of Natural Gas Services common stock. All of the shares, upon issuance, will be “restricted” securities within the meaning of Rule 144 under the Securities Act of 1933, as amended, and will bear a legend to that effect.

4.	Rental Activity

Year Ended December 31,
2005		$	3,292
2006			856
2007			342
2008			179
Total		$	4,669

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5.	Line of Credit

6.	Long-term Debt

Note payable to a bank, interest at bank’s prime rate plus 1.0% but not less than 5.25% (6.25% at December 31, 2004), monthly payments of principal of $170,801 plus interest until maturity on September 15, 2007. The note is collateralized by substantially all of the assets of the Company. See Note 5 regarding loan covenants		$	5,301
Note payable to a bank, interest at bank’s prime rate plus 1% but not less than 5.25% (6.25% at December 31, 2004). This is an advance line of credit note for $10,000,000. Interest is payable monthly. Principal is due in 60 consecutive payments beginning December 15, 2004 until November 15, 2009. The note is collateralized by substantially all of the assets of the Company. See Note 5 regarding loan covenants			7,133
Note payable to a bank, interest at 7%, monthly payments of principal and interest totaling $2,614 until maturity in September 2010, collateralized by a building			182
Various notes payable to a bank, interest rates ranging from prime plus 1% (6.25% at December 31, 2004) to 7.50%			177
Capital lease			13
Other notes payable for vehicles, various terms			212
Total			13,018
Less current portion			(3,728	)
		$	9,290

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2005		$	3,728
2006			3,615
2007			2,667
2008			1,438
2009			1,439
Thereafter			131
		$	13,018

7.	Subordinated Notes

8.	Income Taxes

			2003				2004
Current provision:
	Federal		$	—			$	—
	State			25				20
				25				20
Deferred provision:
	Federal			593				1,029
	State			79				91
				672				1,120
			$	697			$	1,140

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				2003				2004
Deferred income tax assets:
	Net operating loss			$	727			$	2,669
	Other				5				7
		Total deferred income tax assets			732				2,676
Deferred income tax liabilities:
	Property and equipment				(2,410	)			(5,483	)
	Goodwill and other intangible assets				(154	)			(142	)
	Other				(11	)			(9	)
		Total deferred income tax liabilities			(2,575	)			(5,634	)
		Net deferred income tax liabilities		$	(1,843	)		$	(2,958	)

		2003				2004
Statutory rate			34	%			34	%
State and local taxes			5	%			3	%
Nontaxable life insurance proceeds			—				(12	)%
Other			(4	)%			—
Effective rate			35	%			25	%

9.	Stockholders’ Equity

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10.	Stock-Based Compensation

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			December 31, 2003								December 31, 2004
							Weighted								Weighted
			Number				Average				Number				Average
			of				Exercise				of				Exercise
			Shares				Price				Shares				Price
Outstanding, beginning of year				161,500			$	2.41				80,000			$	3.92
	Canceled or expired			(9,000	)			3.25				—				—
	Granted			27,500				5.57				38,000				7.50
	Exercised			(100,000	)			2.00				(11,000	)			3.23
Outstanding, end of year				80,000			$	3.92				107,000			$	5.26
Exercisable, end of year				43,000			$	3.68				46,000			$	5.06

11.	Commitments

2005		$	50,000
2006			44,000
2007			32,000
2008			13,000
		$	139,000

12.	Major Customers and Concentration of Credit Risk

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13.	Other Income

14.	Segment Information

						Service &
		Sales				Maintenance				Rental				Corporate				Total
		(in thousands of dollars)
Revenue		$	3,865			$	1,773			$	7,112				—			$	12,750
Cost of Sales			2,860				1,243				1,954				—				6,057
Gross Margin		$	1,005			$	530			$	5,158				—			$	6,693
Operating Expenses			—				—				—				(4,018	)			(4,018	)
Other Income/(Expense)			—				—				—				(671	)			(671	)
Net Income before Provision for Income Taxes		$	1,005			$	530			$	5,158			$	(4,689	)		$	2,004
*Segment Assets			—				—				—			$	28,270			$	28,270

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						Service &
		Sales				Maintenance				Rental				Corporate				Total
		(in thousands of dollars)
Revenue		$	3,593			$	1,874			$	10,491				—			$	15,958
Cost of Sales			2,556				1,357				3,038				—				6,951
Gross Margin		$	1,037			$	517			$	7,453				—			$	9,007
Operating Expenses			—				—				—				(5,096	)			(5,096	)
Other Income/(Expense)			—				—				—				603				603
Income before Provision for Income Taxes		$	1,037			$	517			$	7,453			$	(4,493	)		$	4,514
*Segment Assets			—				—				—			$	43,255			$	43,255

*	Management does not track assets by segment.

15.	Subsequent Events

	•	to facilitate the purchase of SCS
	•	to refinance SCS’ existing real estate debt;
	•	to increase the amount of funds available for general working capital purposes;
	•	to modify our existing term loan facility; and
	•	to reflect the availability of additional funds for the construction of new compressor units for rent and resale.

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	/s/ Hein & Associates llp

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				December 31,
				2003
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	176
	Trade accounts receivable, net of doubtful accounts of $5				817
	Inventory				2,554
	Prepaid expense and other				107
		Total current assets			3,654
RENTAL EQUIPMENT, net of accumulated depreciation of $2,979					18,986
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $907					2,818
GOODWILL, net of accumulated amortization of $325					2,590
PATENTS, net of accumulated amortization of $137					114
OTHER ASSETS					108
		Total assets		$	28,270
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Current portion of long-term debt and capital lease			$	2,364
	Line of credit				300
	Accounts payable and accrued liabilities				1,071
	Deferred income				207
		Total current liabilities			3,942
LONG-TERM DEBT AND CAPITAL LEASE, less current portion					6,651
SUBORDINATED NOTES, net of discount of $130					1,409
DEFERRED TAX LIABILITY					1,843
COMMITMENT (Note 11)
STOCKHOLDERS’ EQUITY:
	Preferred stock, 5,000 shares authorized, par value $0.01:
	10% Convertible Series A: 382 shares authorized, 344 shares outstanding; 10% cumulative, liquidation preference of $1,117				4
	Common stock, 30,000 shares authorized, par value $0.01; 5,031 shares issued and outstanding				50
	Additional paid-in capital				11,205
	Retained earnings				3,166
		Total stockholders’ equity			14,425
		Total liabilities and stockholders’ equity		$	28,270

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				For the Years Ended
				December 31,
				2002				2003
REVENUE:
	Sales, net			$	4,336			$	3,865
	Service and maintenance income				1,563				1,773
	Rental income and interest				4,398				7,112
		Total revenue			10,297				12,750
OPERATING COSTS AND EXPENSES:
	Cost of sales, exclusive of depreciation shown separately below				3,078				2,860
	Cost of service, exclusive of depreciation shown separately below				1,327				1,243
	Cost of leasing, exclusive of depreciation shown separately below				1,167				1,954
	Selling expenses				500				679
	General and administrative				1,218				1,613
	Depreciation and amortization				1,166				1,726
		Total operating costs and expenses			8,456				10,075
OPERATING INCOME					1,841				2,675
OTHER INCOME (EXPENSE):
	Interest Expense				(975	)			(667	)
	Equity in earnings of joint venture				485				—
	Other income (expense)				19				(4	)
		Total other income (expense)			(471	)			(671	)
INCOME BEFORE PROVISION FOR INCOME TAXES					1,370				2,004
PROVISION FOR INCOME TAXES:
	Current				26				25
	Deferred				558				672
		Total income tax expense			584				697
NET INCOME					786				1,307
PREFERRED DIVIDENDS					107				121
INCOME AVAILABLE TO COMMON STOCKHOLDERS				$	679			$	1,186
EARNINGS PER COMMON SHARE:
	Basic			$	0.19			$	0.24
	Diluted			$	0.16			$	0.23
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
	Basic				3,649				4,947
	Diluted				4,305				5,253

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		Preferred Stock								Common Stock								Additional								Total
																		Paid-In				Retained				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Earnings				Equity
BALANCES, January 1, 2002			377			$	4				3,358			$	34			$	4,443			$	1,300			$	5,781
Issuance of preferred stock			5				—				—				—				12				—				12
Issuance of common stock and warrants			—				—				1,500				15				6,514				—				6,529
Warrants issued for debt guaranty			—				—				—				—				42				—				42
Repurchase of warrants			—				—				—				—				(43	)			—				(43	)
Dividends on preferred stock			—				—				—				—				—				(106	)			(106	)
Net income			—				—				—				—				—				786				786
BALANCES, January 1, 2003			382				4				4,858				49				10,968				1,980				13,001
Exercise of common stock options and warrants			—				—				135				1				237				—				238
Conversion of preferred stock to common stock			(38	)			—				38				—				—				—				—
Dividends on preferred stock			—				—				—				—				—				(121	)			(121	)
Net Income			—				—				—				—				—				1,307				1,307
BALANCES, December 31, 2003			344			$	4				5,031			$	50			$	11,205			$	3,166			$	14,425

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						For the Years Ended
						December 31,
						2002				2003
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income					$	786			$	1,307
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization					1,166				1,726
		Deferred taxes					558				672
		Amortization of debt issuance costs					70				65
		Gain on disposal of assets					(15	)			18
		Warrants issued for debt guarantee					42				—
		Equity in earnings of joint venture					(485	)			—
		Changes in current assets:
			Trade and other receivables				277				(392	)
			Inventory				140				(1,078	)
			Prepaid expenses and other				(12	)			66
		Changes in current liabilities:
			Accounts payable and accrued liabilities:				(349	)			543
			Deferred income				134				174
		Other changes					(106	)			(77	)
				Net cash provided by operating activities			2,206				3,024
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment						(4,415	)			(7,882	)
	Proceeds from sale of property and equipment						40				120
	Distribution from equity method investment						405				108
	Decrease in lease receivable						85				210
				Net cash used in investing activities			(3,885	)			(7,444	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from lines of credit						—				300
	Proceeds from long-term debt						1,957				3,479
	Repayments of long-term debt						(4,463	)			(2,014	)
	Dividends on preferred stock						(107	)			(121	)
	Proceeds from sale of stock and exercise of stock options and warrants						6,529				238
	Net proceeds from preferred stock sales						13				—
	Purchase of warrants from underwriter						(43	)			—
				Net cash provided by financing activities			3,886				1,882
NET CHANGE IN CASH							2,207				(2,538	)
CASH, beginning of year							507				2,714
CASH, end of year						$	2,714			$	176
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Interest paid					$	976			$	667
	Income taxes paid					$	4			$	35

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1.	Summary of Significant Accounting Policies

	•	Rotary Gas Systems, Inc. (“RGS”) (a Texas corporation) is engaged in the manufacturing and distribution of natural gas compressor packages for use in the petroleum industry and natural gas flare stacks and ignition systems for use in oilfield, refinery, petrochemical plant, and landfill applications in New Mexico, California and Texas.
	•	NGE Leasing, Inc. (“NGE”) (a Texas corporation) is engaged in leasing natural gas compressor packages to entities in the petroleum industry and irrigation motor units to entities in the agricultural industry. NGE’s leasing income is concentrated in New Mexico, California and Texas.
	•	Great Lakes Compression, Inc., (“GLC”) (a Colorado corporation) was formed in March 2001 and acquired the assets and certain operations of a business that fabricates, rents, and services natural gas compressors to producers of oil and natural gas, primarily in Michigan.

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Raw materials		$	1,970
Work in process			584
		$	2,554

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				Year Ended
				December 31,
				2002				2003
Numerator:
	Net income			$	786			$	1,307
	Less preferred dividends				107				121
	Income available to common stockholders				679				1,186
Denominator for basic net income per share:
	Weighted average common shares outstanding				3,649				4,947
Denominator for diluted net income per share:
	Weighted average common shares outstanding				3,649				4,947
	Dilutive effect of stock options and warrants				656				306
		Diluted weighted average shares			4,305				5,253
Earnings per share:
	Basic			$	0.19			$	0.24
	Diluted			$	0.16			$	0.23

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		Years Ended
		December 31,
		2002				2003
Net income		$	786			$	1,307
Less: preferred dividends			107				121
Income available to common stockholders			679				1,186
Add: Stock-based employee compensation included in reported net income			—				—
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards			(39	)			(39	)
Net income, pro forma		$	640			$	1,147
Net income per share:
Basic, as reported		$	0.19			$	0.24
Basic, pro forma		$	0.18			$	0.23
Diluted, as reported		$	0.16			$	0.23
Diluted, pro forma		$	0.15			$	0.21
Weighted average fair value of options granted during the year		$	2.24			$	3.35

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2.	Property and Equipment

Land and building		$	1,346
Leasehold improvements			150
Office equipment and furniture			153
Software			126
Machinery and equipment			424
Vehicles			1,526
Less accumulated depreciation			(907	)
		$	2,818

3.	Acquisition

4.	Rental Activity

Year Ended December 31,
2004		$	3,549
2005			1,935
2006			235
2007			85
Total		$	5,804

5.	Line of Credit

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6.	Long-Term Debt

Note payable to a bank, interest at bank’s prime rate plus 1.0% but not less than 5.25% (5.25% at December 31, 2003), monthly payments of principal of $170,801 plus interest until maturity on September 15, 2007. The note is collateralized by substantially all of the assets		$	7,350
Note payable to a bank, interest at bank’s prime rate plus 1% but not less than 5.25% (5.25% at December 31, 2003). This is an advance line credit note for $10,000,000. Interest is payable monthly. Principal is due in 60 consecutive payments beginning December 15, 2004 until November 15, 2009. The note is collateralized by substantially all of the assets of the Company. See Note 5 regarding loan covenants			750
Note payable to a bank, interest at 7%, monthly payments of principal and interest totaling $2,614 until maturity in September 2010, collateralized by a building			200
Note payable to an individual, interest at 7%, monthly payments of principal and interest totaling $1,255 until maturity in October 2009. This note is collateralized by a building			72
Various notes payable to a bank, interest rates ranging from prime plus 1% (5.00% at December 31, 2003) to 7.50%			312
Capital lease			29
Other notes payable for vehicles, various terms			302
Total			9,015
Less current portion			(2,364	)
		$	6,651

2004		$	2,364
2005			2,451
2006			2,337
2007			1,377
2008			174
Thereafter			312
		$	9,015

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7.	Subordinated Notes

8.	Income Taxes

			2002				2003
Current provision:
	Federal		$	—			$	—
	State			26				25
				26				25
Deferred provision:
	Federal			492				593
	State			66				79
				558				672
			$	584			$	697

				2002				2003
Deferred income tax assets:
	Net operating loss			$	892			$	727
	Other				48				5
		Total deferred income tax assets			940				732
Deferred income tax liabilities:
	Property and equipment				(1,962	)			(2,410	)
	Goodwill and other intangible assets				(149	)			(154	)
	Other				—				(11	)
		Total deferred income tax liabilities			(2,111	)			(2,575	)
		Net deferred income tax liabilities		$	(1,171	)		$	(1,843	)

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		2002				2003
Statutory rate			34	%			34	%
State and local taxes			7	%			5	%
Other			2	%			(4	)%
Effective rate			43	%			35	%

9.	Stockholders’ Equity

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10.	Stock-Based Compensation

			December 31, 2002								December 31, 2003
							Weighted								Weighted
			Number				Average				Number				Average
			of				Exercise				of				Exercise
			Shares				Price				Shares				Price
Outstanding, beginning of year				112,000			$	2.00				161,500			$	2.41
	Canceled or expired			—				—				(9,000	)			3.25
	Granted			49,500				3.35				27,500				5.57
	Exercised			—				—				(100,000	)			2.00
Outstanding, end of year				161,500			$	2.41				80,000			$	3.92
Exercisable, end of year				128,800			$	2.21				43,000			$	3.68

11.	Commitment

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12.	Major Customers and Concentration of Credit Risk

13.	Segment Information

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						Service &
		Sales				Maintenance				Rental				Corporate				Total
		(in thousands of dollars)
Revenue		$	3,865			$	1,773			$	7,112				—			$	12,750
Cost of Sales			2,860				1,243				1,954				—				6,057
Gross Margin		$	1,005			$	530			$	5,158				—			$	6,693
Operating Expenses			—				—				—				(4,018	)			(4,018	)
Other Income/(Expense)			—				—				—				(671	)			(671	)
Net Income before Provision for Income Taxes		$	1,005			$	530			$	5,158			$	(4,689	)		$	2,004
*Segment Assets			—				—				—			$	28,270			$	28,270

*	Management does not track assets by segment.

						Service &
		Sales				Maintenance				Rental				Corporate				Total
		(in thousands of dollars)
Revenue		$	4,336			$	1,563			$	4,398				—			$	10,297
Cost of Sales			3,078				1,327				1,167				—				5,572
Gross Margin		$	1,258			$	236			$	3,231				—			$	4,725
Operating Expenses			—				—				—				(2,884	)			(2,884	)
Other Income/(Expense)			—				—				—				(471	)			(471	)
Net Income before Provisions for Income Taxes		$	1,258			$	236			$	3,231			$	(3,355	)		$	1,370
*Segment Assets			—				—				—			$	23,937			$	23,937

*	Management does not track assets by segment.

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				September 30,
				2005
				(unaudited)
				(in thousands
				of dollars)
ASSETS
Current Assets:
	Cash and cash equivalents			$	5,729
	Accounts receivable — trade, net of allowance				6,894
	Inventory				14,369
	Prepaid expenses				238
		Total current assets			27,230
Rental equipment, net of accumulated depreciation					37,357
Other property, plant and equipment, net of depreciation					6,691
Goodwill, net of accumulated amortization					8,154
Intangibles, net of accumulated amortization					4,059
Restricted cash					2,000
Other assets					92
		Total Assets		$	85,583
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Current portion of long term debt			$	4,103
	Bank line of credit				300
	Accounts payable and accrued liabilities				8,780
	Unearned Income				235
		Total current liabilities			13,418
Long term debt, less current portion					21,610
Subordinated notes, less current portion					2,000
Deferred income tax payable					4,658
		Total liabilities			41,686
Common stock					90
Paid in capital					34,260
Retained earnings					9,547
		Shareholders’ Equity			43,897
		Total Liabilities and Shareholders’ Equity		$	85,583

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					Nine Months Ended
					September 30,
					2004				2005
					(unaudited)
Revenue:
	Sales				$	2,445			$	22,066
	Service and maintenance income					1,370				1,770
	Rental income					7,405				11,696
		Total revenue				11,220				35,532
Operating costs and expenses:
	Cost of sales, exclusive of depreciation shown separately below					1,699				16,977
	Cost of service and maintenance, exclusive of depreciation shown separately below					1,030				1,145
	Cost of rentals, exclusive of depreciation shown separately below					2,174				4,539
	Selling expense					630				750
	General and administrative expense					1,368				2,850
	Depreciation and amortization					1,751				3,026
		Total operating costs and expenses				8,652				29,287
Operating Income						2,568				6,245
Other Income (Expense)
	Interest expense					(580	)			(1,439	)
	Other					1,496				51
		Total other income (expense)				916				(1,388	)
Income before income taxes						3,484				4,857
	Provision for income tax					774				1,797
Net Income						2,710				3,060
	Preferred dividends					53				—
Income available to common shareholders					$	2,657			$	3,060
			Earnings per share:
			Basic		$	0.49			$	0.43
			Diluted		$	0.43			$	0.37
			Weighted average Shares:
			Basic			5,428				7,078
			Diluted			6,217				8,213

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					Nine Months				Nine Months
					Ended				Ended
					September 30,				September 30,
					2004				2005
					(unaudited)
					(in thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
		Net income			$	2,710			$	3,060
			Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization			1,751				3,026
			Deferred taxes			770				1,700
			Amortization of debt issuance costs			49				49
			Gain on disposal of assets			7				(47	)
			Changes in current assets and liabilities:
			Trade and other receivables			(371	)			(2,057	)
			Inventory and work in progress			(625	)			(5,345	)
			Prepaid expenses and other			(72	)			(32	)
			Accounts payable and accrued liabilities			575				4,180
			Deferred income			(89	)			(723	)
			Other assets			(16	)			323
NET CASH PROVIDED BY OPERATING ACTIVITIES						4,689				4,134
CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchase of property and equipment				(8,937	)			(13,107	)
		Assets acquired, net of cash				—				(7,584	)
		Proceeds from sale of property and equipment				50				239
	NET CASH USED IN INVESTING ACTIVITIES					(8,887	)			(20,452	)
CASH FLOWS FROM FINANCING ACTIVITIES:
		Net proceeds from bank loans				5,031				20,517
		Net proceeds from line of credit				521				300
		Repayments of long term debt				(1,821	)			(12,268	)
		Repayments of line of credit				(300	)			—
		Dividends paid on preferred stock				(53	)			—
		Proceeds from exercise of warrants and stock options				5,052				12,813
NET CASH PROVIDED BY FINANCING ACTIVITIES						8,430				21,362
NET INCREASE IN CASH						4,232				5,044
CASH AT BEGINNING OF PERIOD						176				685
CASH AT END OF PERIOD					$	4,408			$	5,729
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
		Interest paid			$	580			$	1,396
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
		Assets acquired for issuance of subordinated debt			$	—			$	3,000
		Assets acquired for issuance of common stock			$	—			$	5,120

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		Nine Months Ended
		September 30,
		2004				2005
Pro forma impact of fair value method
Income applicable to common shares, as reported		$	2,657			$	3,060
Compensation expenses regained under Opinion 25							21
Pro-forma stock-based compensation costs under the fair value method, net of related tax			(20	)			(106	)
Pro-forma income applicable to common shares under the fair-value method		$	2,637			$	2,975
Earnings per common share
Basic earnings per share reported		$	0.49			$	0.43
Diluted earnings per share reported		$	0.43			$	0.37
Pro-forma basic earnings per share under the fair value method		$	0.49			$	0.42
Pro-forma diluted earnings per share under the fair value method		$	0.42			$	0.36
Weighted average Black-Scholes fair value assumptions:
Risk free rate			4.0%- 5.2	%			6.75%- 7.25	%
Expected life			5-10 yrs				5-10 yrs
Expected volatility			50.0	%			39.0	%
Expected dividend yield			0.0	%			0.0	%

	•	$8 million in cash;
	•	promissory notes issued by Natural Gas Services Group, Inc. in the aggregate principal amount of $3 million bearing interest at the rate of 4.00% per annum, maturing three years from the date of closing and secured by a letter of credit in the face amount of $2 million; and
	•	609,756 shares of Natural Gas Services Group, Inc. common stock valued at $5.1 million. All of the shares are “restricted” securities within the meaning of Rule 144 under the Securities Act of 1933, as amended, and bear a legend to that effect.

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		Nine Months Ended
		September 30, 2004
		(unaudited)
Revenue		$	27,217
Net income available to common shareholders		$	4,672
Net Income per share, basic		$	0.77
Net Income per share, diluted		$	0.68

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				Nine Months
				Ended
				September 30
				2004				2005
Basic earnings per share
	Numerator:
		Net income		$	2,710			$	3,060
		Less: dividends on preferred shares			(53	)			—
		Income available to common shareholders		$	2,657			$	3,060
	Denominator:
		Weighted average common shares outstanding			5,428				7,077
		Basic earnings per share		$	0.49			$	0.43
Diluted earnings per share
	Numerator:
		Net income		$	2,710			$	3,060
		Less: dividends on preferred shares			(53	)			—
		Income available to common shareholders		$	2,657			$	3,060
	Denominator:
		Weighted average common shares outstanding			5,428				7,077
		Dilutive effect of common stock options and warrants			789				1,136
		Diluted weighted average shares			6,217				8,213
		Diluted earnings per share		$	0.43			$	0.37

						Service &
		Sales				Maintenance				Rental				Corporate				Total
Revenue		$	2,445			$	1,370			$	7,405							$	11,220
Operating costs and expenses			1,699				1,030				2,174				3,749				8,652
Operating income		$	746			$	340			$	5,231			$	(3,749	)		$	2,568
*Segment Assets			—				—				—			$	40,691			$	40,691

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						Service &
		Sales				Maintenance				Rental				Corporate				Total
Revenue		$	22,066			$	1,770			$	11,696							$	35,532
Operating costs and expenses			16,977				1,145				4,539				6,626				29,287
Operating income		$	5,089			$	625			$	7,157			$	(6,626	)		$	6,245
*Segment Assets			—				—				—			$	85,583			$	85,583

*	Management does not track assets by segment

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	/s/ Hein & Associates llp

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				December 31,
				2004
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	834
	Trade accounts receivable, net of allowance for doubtful accounts of $2				2,839
	Inventory, net of allowance of $325				4,554
	Prepaid expenses and other				47
		Total current assets			8,274
RENTAL EQUIPMENT, net of accumulated depreciation of $159					175
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,183					2,872
GOODWILL					550
OTHER ASSETS					19
		Total assets		$	11,890
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Current portion of long-term debt			$	81
	Accounts payable and accrued liabilities				2,244
	Deferred revenue				936
		Total current liabilities			3,261
LONG-TERM DEBT, less current portion					1,323
COMMITMENTS (Notes 3, 7, & 8)
STOCKHOLDERS’ EQUITY:
	Common stock, 200 shares authorized, par value $0.01; 100 shares issued and outstanding				1
	Retained earnings				7,305
		Total stockholders’ equity			7,306
		Total liabilities and stockholders’ equity		$	11,890

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					For the Years Ended
					December 31,
					2003				2004
REVENUE:
	Sales, net				$	10,573			$	21,018
	Service and maintenance income					207				311
	Rental income					95				95
			Total revenue			10,875				21,424
OPERATING COSTS AND EXPENSES:
	Cost of sales, exclusive of depreciation shown separately below					7,977				16,037
	Cost of service and maintenance, exclusive of depreciation shown separately below					60				135
	Selling expenses					165				109
	General and administrative					1,308				2,107
	Depreciation and amortization					304				328
			Total operating costs and expenses			9,814				18,716
OPERATING INCOME						1,061				2,708
OTHER INCOME (EXPENSE)
	Interest income					35				23
	Interest expense					(119	)			(116	)
	Other					34				71
			Total other income (expense)			(50	)			(22	)
NET INCOME					$	1,011			$	2,686
NET INCOME PER COMMON SHARE:
		Basic and diluted			$	10.11			$	26.86
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
		Basic and diluted				100				100

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		Common Stock												Total
										Retained				Stockholders’
		Shares				Amount				Earnings				Equity
BALANCES, January 1, 2003			100			$	1			$	5,378			$	5,379
Distributions			—				—				(443	)			(443	)
Net income			—				—				1,011				1,011
BALANCES, January 1, 2004			100				1				5,946				5,947
Distributions			—				—				(1,327	)			(1,327	)
Net income			—				—				2,686				2,686
BALANCES, December 31, 2004			100			$	1			$	7,305			$	7,306

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						For the Years Ended
						December 31,
						2003				2004
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income					$	1,011			$	2,686
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization					304				328
		Gain on disposal of assets					(21	)			—
		Changes in current assets:
			Short-term investments				(23	)			684
			Trade accounts receivable				404				(1,523	)
			Inventory				412				(2,525	)
			Prepaid expenses and other				64				26
		Changes in current liabilities:
			Accounts payable and accrued liabilities				(936	)			1,546
			Deferred revenue				16				936
				Net cash provided by operating activities			1,231				2,158
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment						(272	)			(247	)
	Proceeds from sale of property and equipment						45				—
	Acquisition of remaining interest in CIP										(550	)
				Net cash used in investing activities			(227	)			(797	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from long-term debt						—				2,450
	Repayments of long-term debt						(121	)			(2,527	)
	Dividends on common stock						(298	)			(1,327	)
	Change in due to/from stockholder						30				(91	)
				Net cash used in financing activities			(389	)			(1,495	)
NET CHANGE IN CASH							615				(134	)
CASH, beginning of year							353				968
CASH, end of year						$	968			$	834
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Interest paid					$	119			$	116
	Non-cash distribution					$	101			$	—

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1.	Summary of Significant Accounting Policies

	Organization

	Principles of Consolidation

	Cash Equivalents

	Accounts Receivable

	Inventory

Raw materials		$	3,177
Work in process			1,702
			4,879
Less: inventory allowance			(325	)
		$	4,554

	Property and Equipment

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	Long-Lived Assets

	Goodwill

	Advertising Costs

	Financial Instruments

	Revenue Recognition

	Per Share Data

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			Year Ended
			December 31,
			2003				2004
Numerator:
	Net income		$	1,011			$	2,686
Denominator for basic and diluted net income per share:
	Weighted average common shares outstanding			100				100
Net income per share:
	Basic and diluted		$	10.11			$	26.86

	Income Taxes

	Use of Estimates

2.	Property and Equipment

Building		$	2,114
Furniture and fixtures			135
Software			98
Machinery and equipment			1,212
Vehicles			496
			4,055
Less accumulated depreciation and amortization			(1,183	)
		$	2,872

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3.	Line of Credit

4.	Long-Term Debt

Note payable to a bank, interest at 6.50%, monthly payments of principal and interest of $14 with remaining principal due upon maturity in January 2008. The note is collateralized by a building and guaranteed by a stockholder		$	1,399
Other notes payable for vehicles, various terms			4
Total			1,403
Less current portion			(80	)
		$	1,323

2005		$	80
2006			82
2007			87
2008			1,154
		$	1,403

5.	401(k) Plan

6.	Major Customers and Concentration of Credit Risk

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7.	Operating Leases

2005			$	25
2006				26
2007				27
2008				27
2009				28
	Thereafter			134
			$	267

2005		$	62
2006			66
2007			66
2008			16
		$	210

8.	Subsequent Event

	•	$8 million in cash;
	•	promissory notes issued by Natural Gas Services Group, Inc. in the aggregate principal amount of $3 million bearing interest at the rate of 4.00% per annum, maturing three years from the date of closing and secured by a letter of credit in the face amount of $2 million; and
	•	609,756 shares of Natural Gas Services Group, Inc. common stock valued at $5.1 million. All of the shares are “restricted” securities within the meaning of Rule 144 under the Securities Act of 1933, as amended, and bear a legend to that effect.

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				NGS				SCS				Pro Forma				Combined
				Historical				Historical				Adjustments				Pro Forma
REVENUE:
	Sales			$	3,593			$	21,018			$	—			$	24,611
	Service and maintenance income				1,874				311				—				2,185
	Rental income				10,491				95				—				10,586
		Total revenue			15,958				21,424				—				37,382
OPERATING COSTS AND EXPENSES:
	Cost of sales, exclusive of depreciation shown separately below				2,556				16,037				—				18,593
	Cost of service, exclusive of depreciation shown separately below				1,357				135				—				1,492
	Cost of rental, exclusive of depreciation shown separately below				3,038				—				—				3,038
	Selling expense				875				109				—				984
	General and administrative expense				1,777				2,107				—				3,884
	Depreciation and amortization				2,444				328				299	(a)			3,071
		Total operating costs and expenses			12,047				18,716				299				31,062
OPERATING INCOME					3,911				2,708				(299	)			6,320
OTHER INCOME (EXPENSE)
	Interest income				—				23				—				23
	Interest expense				(838	)			(116	)			(620	)(b)			(1,574	)
	Other income				1,441				71				—				1,512
		Total other income (expense)			603				(22	)			(620	)			(39	)
INCOME BEFORE INCOME TAXES					4,514				2,686				(919	)			6,281
Income tax expense (benefit)					1,140				—				940	(c)			2,080
NET INCOME					3,374				2,686				(1,859	)			4,201
PREFERRED DIVIDENDS					53				—				—				53
INCOME AVAILABLE TO COMMON SHAREHOLDERS				$	3,321			$	2,686			$	(1,859	)		$	4,148
Basic earnings per share				$	0.59			$	26.86							$	0.67
Diluted earnings per share				$	0.52			$	26.86							$	0.59
Weighted Average Common Shares Outstanding
	Basic				5,591				100				610	(d)			6,201
	Diluted				6,383				100				610	(d)			6,993

(a)		To record a year’s amortization of intangible assets acquired from SCS based on estimated values and useful lives.
(b)		To record a year’s interest expense on amounts borrowed to finance the purchase of SCS.
(c)		To record income tax effect of acquisition of SCS, which was an S-Corporation until the acquisition, and these pro-forma adjustments.
(d)		To record the issuance of 609,756 shares of common stock to the former stockholders of SCS as of January 1, 2004.

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